Dilemma regarding rent charge for friend

In what world is £3000 a year a small amount to people?
Think of what that might potentially do for her son, or what difference 10 years of £3000 a year might do for him if the OP can no longer be as hands on.

TBH, in your situation I'd be looking at selling the flat before May, and investing elsewhere.
In the next few years it's going to be much harder to evict, even to sell the property.
Harder to put rent up.
Costs of repairs are increasing, so what it costs you to maintain now won't be enough to cover it then. Properties getting older means new boiler/ kitchen/ bathroom time.
Landlord licensing is a possibility to come in.
The new rules for EPCs could cost you a fortune, if it's even possible to get the property up to the standard.
Who knows what will happen with capital gains tax?
Making Tax Digital means you're probably going to have to invest in bookkeeping software to complete a self assessment for it.

Honestly, for all of that, I would (and am) sell the property and put it in a S&S ISA.

You should sit down and work out all costs associated with the property. Include everything. Put back a set amount to replace carpets every 6 years, kitchen every 12 years and bathroom every 15 years. I know they might need replacing more frequently depending on how tenants treat the house but ARLA use these frequencies. Get total costs of renting dividends by 12. That is minimum you should charge for rent. You need to increase the rent now. Find out what similar houses are rented out for on Right Move and show the tenant these. As previous poster stated from May 1st you can only increase rent once a year up to full market value but it will be harder for tenants to manage a large increase all at once. This is why I increase each year by inflation but cap at 7 percent. If inflation is 2 percent it increases by 2 percent because my house insurance, boiler insurance, boiler service, gas and electric certificates, and maintenance and repair costs go up each year often by more than inflation. The way I do it is to look at what other houses in same road or area are renting out for, take away £100-150 then that is my base rent. I know if I increase by inflation each year asost LL's do I will always win any rental dispute a tenant might bring as panel look at similar priced houses in the locality and if you are renting at a very similar or lower price you would win any rental price dispute.

If you don't need the money and they are good tenants them leave it. I'd you make it market value they may leave. You then have the issue of new tenanta and the management of that. They could be very problematic
Just put the rent up gradually each year gently

as far as im aware the new rules around rent increases - you can only increase the rent by inflation - so if inflation is at 3% then that is the amount you can increase for that year.

If you are charging £600 rent then you can increase £18 per month this year and then if inflation is 3% again next year you'll be able to increase by £18.54

It's a tricky one because, as you say, it's a relief having a tenant you know will take care of the property and always pay the rent vs the unknown tenant. I think you need to weigh up which is of more value - peace of mind and the steady income or the risk vs higher financial reward of potentially having to find a new tenant. An option would be to gradually increase the rent year on year, until it is up to or near market value.

Just explain to your friend the situation. A good friend will understand. Give them six months notice to find somewhere new and promise a glowing reference for them to their next landlord.

If your son is never going to be able to use this flat, is it financially better to keep it or sell it?
it may be worth visiting an (independent) financial planner as selling the flat and putting the money into shares/investments may be an alternative. I wonder whether it’d be possible to put the property into a trust for your sons future and part of the management of the trust would bee maximising the income as it should be in your sons best interest.

I would raise it every year by about inflation.
It's better to keep it little annually then suddenly realise you have made a loss the last few years and do a big jump.

My observation is that keeping it low and then doing a necessary but large jump causes far more resentment. People don't lookback and say "you've been so kind keeping it low for 5 years and we can see we're still paying low, we understand why you're putting it up." They say " How could you put it up that much. You can't possibly expect us to pay that. It's not fair".

If they are a true friend they will understand that you need to build up a nest egg for your son.
They should recognise the fact that they have benefitted from your considerable generosity for years. Do not feel bad here!

Unless you really need the money, I would stick with her as a tenant as having someone you don’t know in and also possibly a change in tenant every year or so is a lot more work and cost. Worth it for the stability.

Assuming that you will need every penny you can get to support an adult who will never work, I think you have to maximise your income here. A good friend will understand, as long as you give them a substantial amount of time to adjust.

Could you go halfway in between? Up it a bit but not full market value? What are the long term plans? Do you think she’d want to live there forever? At some point your son might actually need the money?

How much of the extra £3000 would you lose to tax?

There is no limit on rent rises but the tenant always has the opportunity to take increases to a rent tribunal if they believe it the rise takes it above market rent. After 1st May the same applies apart from a couple of tweaks and rises will be subject to the s13 process and limited to once per year.

I can understand that you are down on the rental but being as the place is being looked after & you don’t need to worry about your tenant it actually works out at £57.69 per week, only you can decide if it’s worth to move tenant or ask for a small amount more.

£3000 a year is an increase of £250 a month.

BUT... if you ended up with a rubbish tenant, then it could cost you FAR more than the £3000 with damage and unpaid rent.

A reliable tenant who looks after the property on a lower rent is far better than a risky tenant who pays £250 more.

Perhaps increase it by a small amount of say £25 or £50 a month?

Can you give them some decent notice? Let them know that you need to raise the rent in 6/12 months time. This will give them time to save/make changes/ look for a more affordable property.

Yeah, I'd agree with this. Give her six months to move out.

House insurance costs, boiler insurance costs, gas and electric certificates, annual boiler service as well as general maintenance costs all have to be covered by the LL. This is on top of mortgage interest and management costs.

This would be a really bad error. You should start increasing the rent now in increments over the next few years because after 1st May you will be limited to one yearly rise. The other issue is you are clearly not even breaking even. Factor in new carpets, full decoration, new kitchen and bathroom every 15 years and you are very much not breaking even.

It's a common error by landlords who think they are doing tenants a favour. Keeping the rent 10% below market rent is fine for good tenants. But not any more than that for the aforesaid reasons.

Can you not raise it just a little?

You might feel you could profit more by £3k but that’s really not very much money in the grand scheme of things and most landlords would happily take a slight loss for the reassurance of someone looking after their property.

I’ve been a landlord before and over the years had a tenant who didn’t pay, a tenant that caused significant damage resulting in a new kitchen and new carpets (the deposit didn’t cover it all).

Tenants also come with costs when they move in (the landlord pays the admin costs for checking their suitability and for an agency to confirm their credit rating and references etc). This has to be paid for each new tenant and the landlord has to pay the mortgage and bills when the property is empty (and mortgage companies and insurancers usually won’t allow it to be empty for too long, so you will have to stay there yourself or find someone to do so).

I’d have happily paid someone £3k per year to have removed that stress and the expectation of additional costs. I wouldn’t underestimate how incredibly lucky you are to have a good friend who is trustworthy in the property. If you decide to profit off them, they have no reason to show you loyalty and treat you as a friend rather than a landlord or any reason to stay if somewhere else is better.

I would talk to her and be honest about the situation, does she know your original plans for the place?
If not start with that and explain that you thought she would only be renting from you for short - medium term so you were happy to only have cover cost rent.
But now you are trying to save up for your son in the long term .
Obviously you don't expect her to pay for his care via the rent but a small reasonable rise in rent each year to match inflation %.
ie if rent in your are goes up 0.5 % the so does hers , but not bringing it upto the same price as your nighbours.

Better the devil you know….

In an ideal world with another brilliant tenant paying market rate you may currently be down £3k but what if the new tenant doesn’t pay up or damages the flat? I think I’d rather know my asset was being well taken care of. Perhaps suggest a slight increase but I would forego the full amount for a good tenant. In fact, I have done before when I was renting out my house when living overseas. We never increased the rent as we didn’t want to lose our brilliant tenants who loved the house as much as we did.